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Mid-Week Market Sanity Check Topic: Option Review

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General Market Observation: With the pending Greek debt default looming this week and the EU’s rejection of further Greek delays it appears that next week will be a stormy week. As of this writing the Dow futures are down about 250 points. It will be interesting to see how this unravels and how the world markets react after the initial knee jerk. Might the few billion Euros that Greece is defaulting be the catalyst that pulls the rug out of many artificially propped up markets including the US markets? Watch for a significant spike in volatility.

Regarding volatility has anyone noticed how the VIX has been putting out clues since the beginning of the years on when the market would go up and the market would go down? The chart below is a daily chart of the VIX with only the 8 and 20 day EMAs and a 10% Moving Average Envelope based on the 20 day EMA. Since March this chart has been very predictive of market bounces from both resistance and support as daily movement on the VIX chart channels between the highs and lows of the moving average envelope. The VIX tends to move in opposite direction to the indexes and traders often use the VIX as a clue to when markets are ready to turn. The highlighted dates and triangles correspond with good precision with market highs and lows over the last 4 months on the charts below.

If the indexes maintain their current personality then we would expect for prices to rally at some point when the upper level of the moving average envelope is hit. The extra clue is watch for reversal candlesticks. Candlesticks work on this type of chart also. A chart of the SPX has been included with the same dates highlighted.

SPX: Last week price action on the S&P rallied to resistance and spent the last 3 days of the week turning lower finishing just below the 50 day EMA. At this point I see price action within parameters of longer term topping action especially on the weekly chart. If this is where the market chooses to dump then there are numerous support levels where bounces could take place on the way down. There is major support at 2072 which could be challenged next week if the market over reacts (which it typically always does) to the Greek issue. Currently the 40 week moving averages sits at 2053 so this may be a good bounce point also.

Overall the S&P has been the weakest of the tracking Indexes.

Preferred ETF’s: SPY and SPXL

NDX: A rollover and hard sell-off would take price close to the lower part of the uptrend channel that has been place over the past few years. The support at 4400 may provide a slowing but the 40 week moving average may be a better target to the downside for this part of the slide. If price do fall hard tomorrow remember this is the initial reaction and it may actually lead to a relief bounce later in the week. We’ll know soon if that relief bounce is tradable or not.

Preferred ETF’s: QQQ and TQQQ

RUT: If the markets do go into correction mode then typically the Russell will accelerate to the downside more than the other indexes. Up to this point the RUT has been stronger than the other tracking Indexes but due to its makeup of primarily small cap growth stocks it plunges more than wobbles at tops. There are numerous levels of support for any pullback but its a good idea to see where a 5%, 10% and 20% pullback would take prices.

The weekly chart below looks primed for pullback but how far? A complete retracement to the lows of the year would represent an 11% sell off from the highs of this past week.

Preferred ETF’s: IWM and TNA

The Early Warning Alert Service has hit all three major market trading point this year. See this brief update video for more details: https://youtu.be/PRLmPQLHjiI

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Outs & Ins: Team Health Holding (TMH) was added to the IBD 50 this weekend. Big surge after the Court on the ACA this past week. Currently the stock is extended from a breakout above 64.

A thorough review of the IBD 50 revealed a mixed bag of tired leaders and a few newbies holding up fairly well. The major issue over the past few weeks is the lack of buying volume matched up with higher selling volume. To the upside VRX, GTN and TASR look interesting. VDSI may be staging a serious pullback. Downside candidates include AMBA, CYBR, ATHM, ANET and CRUS.

Comments and opinions written below this line of text may be provocative and only obliquely related to trading. Some may find these “Off the Wall” comments challenging to their outlook on life. I will not post any comments made on subject matter below this line, so if you disagree blast away.

OFF THE WALL

Off the Wall: So many things have happen this week that this Off the Wall could turn in to a real rant, but I’m not going to go there. Ah, my discipline must be getting better!

July is Trader’s Mental Health month and we focus on the little tics that tend to effect all traders. These are conscious and subconscious drivers that sneak up on us that impact the way we trade. Some of these issues can be debilitating and actually cause us to blow up our accounts. Often time for successful driven people these issues are what has driven us to success. Naturally we approach trading and incorrectly think that our mindset, work ethic, education and an assortment of other positive traits will propel us to trading success. The biggest challenge I personally faced in becoming a successful trader was coming to grips with what I could control and what I could not control. Now I wasn’t a control freak but all my past career successes were based on what I could do and providential intervention. My thought was if I just work hard enough things will turn out successfully and the majority of the time they did. Then came trading!

Taming the internal me has been the biggest challenge in learning to trade. Getting to the point of understanding that even if my analysis was spot on that doesn’t guarantee a successful trade. Understanding that trading is a about probabilities and that as with all things in life there is a probability of both success and failure. The clue is to learn how to fail quickly! Failing is part of the profession and learning to accept that regardless how good the analysis. The market has a mind of its own and there’s a lot going on that I can’t control. Actually there is NOTHING other than my own action that I can control. Coming to grips with this reality is a major step for all travelers on the journey of becoming Wise, Disciplined and Profitable Master Traders!

Share Your Success: Many of you have sent me notes regarding the success you are having with the Active Trend Trading System. Please send your stories to me at dww@activetrendtrading.com or leave a post on the website. Thanks.